Second Extract from the Book

Investing for Beginners Exposed: Or What Investment Consultants Hide from You

BROKER

DON'T GAMBLE; TAKE ALL YOUR SAVINGS AND BUY SOME GOOD STOCK AND HOLD IT TILL IT GOES UP, THEN SELL IT. IF IT DOESN'T GO UP, DON'T BUY IT.

Will Rogers

Alex is a 27-year old broker employed by a major brokerage firm. Broker performs securities transactions and provides trading consultation for customers. Alex has worked in the brokerage field for three years, but he is a professional, sure of himself in association with strangers, although not very brave at heart.

***

As Anthony and I have small savings, after a while we arranged a meeting with Alex.

"So, guys,” Alex lectured. "I can tell you that there is nothing special about investing. All you need to do is sign a trading agree-ment with us and transfer money into the securities account. And that’s it. Sell, buy and take profits in the account. Easy as that. Profits can be reasonable,” Alex smiled.

“Sure, profit is always a good thing,” half-jokingly I agreed with him. “But perhaps losses are also possible with bad luck, aren’t they?”

“Anything is possible,” there was no hesitation in his voice. “You should remember that stock trading is a risky business. But you must risk, if you want to profit. Should you prefer to stay on the safe side, buy bonds and earn just a few percent interests. It is up to you to decide.”

“Well, well, we know what you are talking about,” Anthony joined the discussion, showing he was not the last to put two and two together. “But from your experience, what is the probability that we will gain or lose?”

“You see, Anthony, probability is difficult to define. Recent experience tells me that in three last years, most transactions have been profitable. Sometimes profits are higher, sometimes lower. But, in general, my actual profits are substantial. The market is growing and now is an excellent time for investing. My advice is: Don't miss this opportunity to invest, as even in less than a month, prices may increase substantially.”

“Prices may decrease as well,” Alex seconded. “The market is the market, nobody can forecast the future. But the lion-hearted who risk their necks make big money with the sweep of a hand. If you don’t want to be one of them, that's your choice, suit yourself.”

“But why should we sign an agreement with your company and not someone else?"

“Of course you can invest your money elsewhere, but you will hardly find anything better. If you work with us, you will be able to make all of your transactions on the Internet or through your broker, so to say, through me,” Alex bent back with some pride.

“What about fees? Aren't they higher at your company?”

“Definitely, not. If you don’t trust me, check yourself. Perhaps they are not the lowest, but surely not the highest. Our systems are reliable, we react quickly to customers and I strongly recommend dealing with us. There are no annual account fees and custody fees are not high either.”

“Is it better to deal online or through a broker?” I was curious.

“As they say, there are advantages and disadvantages to every-thing,” after some hesitation Alex continued talking and I believed that he was going to state the advantages of using a broker versus the online trading platform, attempting to defend the need for his profession.

“The Internet system is designed for people who prefer to do everything by themselves, those who have the time to follow stock exchange information and, unlike most, can afford such luxury. Skilled brokers perform transactions best. They can call other stock-brokers and find the ones with whom the deal can be done at the best price, if the supply or demand is not sufficient on the stock exchange. This can be extremely important for large orders.” And after glancing at us he added, “But, most probably, that is not relevant to you.”

“Well, well, we are not some peasants to you, are we Arthur?” Anthony played at getting into a huff and nodded his head after turning to me. After my identical reply, Anthony attempted to inter-rogate further.

“What are the advantages of trading on the online trading plat-form?”

“Online? That depends. Online is online. For instance, online trading may be better when orders need to reach the stock exchange immediately, while using a broker can cause some time delay. Also the trading fees for Internet transactions are slightly lower. But even if you pay up to one-half a percent for the transaction commission, does that really matter in comparison with the tens or hundreds of a percent the shares may move up in the near future?” Alex continued.

“So in the very end, using a broker is more expensive…Why is that?” To my mind, transactions online seemed faster and simpler. So far, Alex’s rhetoric about the advantages of using a broker hadn’t had much impact on me.

“Why so? Just think about it! The computer won’t advise you what to buy or when to sell. And I assume broker trading is more reliable. Anytime a human being is needed in the process, it costs more. You are always free to choose which option you like best, which seems more appropriate to you. No pressure,” with a smile, said Alex who looked to be in a cheerful mood, although he was clearly trying to put the heat on us, although in a very subtle way.

“Have you given any thought as to what, in particular, you are going to invest?”

Anthony and my eyes crossed. Clearly, neither of us had thought that seriously about it yet. I paused a bit, expecting Anthony to answer the question. But not seeing his reaction, I took the initiative,

“First we want to find the right opportunities and then we will see where to invest specifically.”

“Roger. Got any more questions, then?”

“So far, that’s it,” we decided in unison.

“Fine, then I have to go and let you two decide what to do next. In a couple of days, I will forward you some material about a few good investments.”

After bidding farewell to Alex, Anthony and I were left alone to chat. When I asked what was on his mind, Anthony took a deep breath and slowly made a declaration,

“You see, brokers are brokers, you never can tell when you can trust them and when you can’t. As one countryman once said, ‘You know, brokers are also needed,’" he said in a strange way.

“Once a broker, always a broker.”

After some small talk, we both headed home.

On the way, I had a lot to brood over. Yes, the game of stocks is a risky thing indeed, but as far as I can tell, it is probably the shortest way to freedom. Maybe I will not turn a profit in the beginning, but, as Anthony put it, twenty percent in one year could be a reasonable expectation. Take twenty percent by twenty percent and you will have made some real money after a couple of years. If I fail, I won’t make too much of a fuss about it, I will just live as everybody else does.

After some consideration, a couple of days later I went to Alex’s company, and after signing all the necessary papers, transferred my savings into a trading account, leaving only a small amount of cash for myself.

It did not take long before my money was available in the secu-rities account and something had to be done about it. As promised, Alex sent me tons of material. To tell the truth, I did not expect to read such a pile of information. I did my best to scrutinize the material as long as my patience could last. When I grew bored with the reading, I was struck by the idea that most investors rely on the intuition more than estimation.

Of all the material I looked through, I chose six companies as the most attractive. Two were banks, one a clothing company, another merchandised food and other daily stuff, another was a pharma-ceutical enterprise and the last one a telecommunications company. To me, all of the companies seemed like normal, working companies with bright prospects.

I liked the banks most. It seems that no matter what happens, the financial institutions know how to make money and nobody can manage without them. Most people transfer their salaries to banks, all of us make payments from our deposits or credit cards, most pay-ments are made via banking transactions. Soon, living without banks will seem utterly impossible; nobody will carry cash and all opera-tions will be performed only with the assistance of mediators. Who is going to benefit? Banks, of course. And me, if I own some stock in the bank. What about loans? More or less, everyone take loans, though it is hard to say how much of the pie goes into the bank’s pockets, but I believe lending certainly doesn’t leave them banks poor.

Both of the banks I chose to invest in seemed to me known and reliable. In fact, according to their income statements, one bank was nearly twice as large as the other, but I liked the second as well. The income and profits of both banks were growing rapidly. In two consecutive years, their profits almost had doubled.

I had read that company growth was equally important. If a company is growing, it is likely that the share price will also rise. And the faster the growth, the more rapid shares will increase in value. Everything looks simple at first sight.

The clothing company also offered a pleasant impression. It goes without saying that you cannot get away without clothes and sooner or later you will have to buy them. The only question is where. By the way, I personally liked to shop at the chosen company’s stores. If the economy is booming, standard of living levels also rise and people tend to avoid places where items of doubtful quality are on sale and prefer shops with better reputations.

My chosen grocery company looked equally valuable. It was similarly fast developing and opening new stores around the country. Nearly all shops and land sites were owned by the company, so there was no need for them to pay rent. Their supermarkets easily push out smaller shops from the market and I had no doubt that the future was in their hands.

The pharmaceutical enterprise looked promising as well. As society gets older and sicker, pharmaceutical advertising accustoms people to treatment, even if they do not need it at all. With rising living standards, health care becomes more and more important, so people tend to buy the pharmaceuticals, vitamins and various food supplements that are produced by pharmaceuticals. The company’s operating results confirmed this fact. It is also a perpetual business, even in bad days, pharmaceuticals are in great demand.

I had slightly more doubt concerning the telecommunications company. It provided some principal communication services, like fixed and mobile telecommunications, Internet and television services. Fixed telecommunications is not very fancy; however, the remaining two looked segments of the market looked promising. Mobile telecommunications are growing fast and life without it seems difficult to imagine. Even my grandmother has a mobile phone. To my understanding, the Internet has a similarly bright future.

Another important aspect of choosing the right company to invest in is the steady growth of the company’s stocks price. It was Alex who advised us to pay attention to the fact that share prices grow if the company’s activities are successful, but if the price drops, then it’s better to avoid such companies, while they might be suffering some problems that are not easy for amateurs to see.

So as soon as the stock market opened on the day I was ready to invest, I loaded the website of Alex’s company and connected to my securities account. Rather easily, I placed orders to buy the shares I had selected. In a couple of days, my portfolio was created and then I only had to watch further developments.

Almost every day I watched as the prices of the shares I had bought changed and practically each check made me extremely satis-fied. Sometimes there were days when the shares lost some value, but the aggregate rise was much more significant. Within the first two months, the prices of all the stocks I had bought increased, except for those of the telecommunications company. Over that period, its share price remained about the same. After costs, it appeared that the value of my investments over those two months had grown by fifteen percent. The success was unbelievable, albeit I had been dreaming about such a result practically for the whole year. And it came true, but only in a pair of months.

I was so thrilled that I wanted to share my success with Anthony and to find out how he was doing. A few days later, we were shaking hands, our eyes revealing our elation.

Anthony was in a state of euphoria, just like I was. The first ques-tion he asked was about my investments.

“How are your investments doing? Have you already made it rich?”

“Well, well, Anthony, right away. I’ve already quit my job, bought a villa in the Maldives Islands. You know, nothing new, as always.” I joshed. But then I told him about my procurements in the market. At the end of my story I asked how he was doing with his assets.

“To tell the truth, I am very much like you. I bought shares in four companies, by the way, three of them jumped like yours, probably, because we made our choices from the same material that Alex sent to us.”

“There is the rub,” I plunged into reverie. “This means we have not invented the wheel and many customers of the same brokerage firm invest in the same companies we do.”

“Yes, you are probably right, but there is nothing bad about that. There are enough shares for everybody," Anthony comforted me.

“Enough is enough, but the largest profits can be expected from investments in the small businesses that are yet undiscovered by investors, while here, if everybody invests in these, we have abso-lutely no chance of being the lucky ones,” I contradicted him.

“Most likely, yes, but for the time being, we cannot complain, while our investments steadily rise. At least, I can’t complain and I don’t think you should.”

This put an end to our conversation about investments. Later, our talk turned to various subjects with the memories of funny adven-tures. Before parting, we agreed that it would be interesting to meet up with Alex again and to get his point of view about our purchases in the market.

My passage home was slow. I began to forget my daily troubles, leisurely making step after step, permitting my feet to shuffle over the...

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